Fannie Mae could need almost $100 billion cash infusion

Fannie Mae is mandated to take the stress test by the Dodd-Frank Act. The idea is to test the relative strength of a financial institution’s capital structure under various economic scenarios. As outlined in the current senior preferred stock purchase agreement as amended by Congress in August 2012, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s ability to accumulate capital is highly restricted and Fannie Mae and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is mandated to trim its capital every year.

One scenario of the stress test is designed to provide insight into whether Fannie Mae has sufficient funding to absorb losses that might occur under extreme economic conditions, such as in the severely adverse scenario. As of December 31, 2013, Fannie had $117.1 billion on the books. The results of the severely adverse scenario, in which a sudden financial shock creates a major recession, indicated Fannie Mae would require $34.4 billion in support from the U.S.Treasury. However, if Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) was required to undertake a one-time accounting charge relating to its deferred tax assets, a $97.2 billion draw from the Treasury would be required.

Stress test results not surprising

Kelli Parsons, Senior Vice President and Chief Communications Officer, points out that the results of the most severe stress test for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) are not surprising. “These results of the severely adverse scenario are not surprising given the company’s limited capital. Under the terms of the senior preferred stock purchase agreement, Fannie Mae is not permitted to retain capital to withstand a sudden, unexpected economic shock of the magnitude required by the stress test.”

Parsons also points out that as well as the stress tests mandated by the Dodd-Frank Act, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA), working together with the FHFA, produced financial projections examining three possible housing price path scenarios. Fannie Mae did not require a draw from Treasury in any of those scenarios.